The bankruptcy of Detroit is an extreme example, but it is not an isolated case. State and local governments face a prolonged squeeze between costly commitments to retirees and demands for better services. Think schools, police, libraries, parks, roads and prisons. As the Great Recession fades, pressures for immediate service cuts may recede, Detroit notwithstanding. Don’t be fooled. The reality is that the scramble for scarce resources is intensifying. Schools compete with nursing homes.
It’s a new twist to an old story. In aging America, demography is politics. In 2025, there will be an estimated 106 million Americans 55 and over, nearly a third of the total population, up from a fifth in 2000. The future wrestles with the past. How much to serve the elderly and how much everyone else? At the national level, Social Security and Medicare are crowding out other programs. Similar conflicts affecting states and localities are less recognized. Spending for the aged is rising rapidly, while revenue growth is slowing.
●Swelling pensions: Not only are they increasing as baby boomers retire, but they’re vastly underfunded. In 2012, promised benefits for state and local pensions exceeded fund assets by $1 trillion, estimates Boston College’s Center for Retirement Research. This estimate may be too low, because it assumes an average 8 percent annual return on pension assets. A 6 percent return, closer to recent experience, would double the unfunded liability to $2 trillion.
●Costlier Medicaid: States cover about 40 percent of the expenses of this health insurance for the poor, and spending could increase by 87 percent from 2012 to 2021, projects the Centers for Medicare and Medicaid Services (CMS). An aging population and expanded eligibility under the Affordable Care Act (Obamacare) are big drivers. Medicaid already consumes 20 percent of states’ general funds, the highest share for any program except K-12 education.
●Weakening tax bases: Since 1980, state and local tax revenues have increased an average of 6 percent annually, says economist Mark Zandi of Moody’s Analytics. But he expects this to drop to 4.5 percent in the next decade, mainly reflecting lower economic growth and inflation.
●Eroding federal grants: States receive 34 percent of their funds from the national government, including Medicaid’s federal share. Deficit reduction imperils grants for both states and localities.
Some stringency is admittedly constructive. It may curb wasteful spending. But today’s pressures transcend this healthy discipline.
“We live in a world of finite resources,” says Rhode Island Treasurer Gina Raimondo, a Democrat who successfully promoted an overhaul of the state’s pensions. When she was elected in 2010, annual pension payments were 10 percent of state taxes and headed toward 20 percent. “You have less money for infrastructure, [K-12] education, affordable housing, higher education,” she says. The changes cut the $7 billion unfunded liability by $3 billion. Eligibility ages, which allowed some workers to retire in their mid-50s, are gradually rising to match Social Security’s. Generous cost-of-living adjustments (COLAs) that increased benefits 3 percent annually were suspended.
Whether Rhode Island’s savings can be duplicated elsewhere is unclear. The problem is that spending on the elderly rises more or less automatically. It takes conscious action to reverse that. States and localities are slowly losing control over their budgets. Cutting pensions is hard. Legally, earned benefits for existing retirees and workers often enjoy contractual protection in state constitutions or laws. Politically, retirees command public sympathy and are represented by powerful government-employee unions.
There’s one escape valve. “States can’t contract away their police powers: the ability to protect the health and welfare of their citizens,” says Amy Monahan, a law professor at the University of Minnesota. They may be able to cut existing benefits if they can convince courts that these overburden other public goals. Both Minnesota and South Dakota cut COLAs and were upheld by state courts, she says. A similar change in Colorado is under court challenge; so are Rhode Island’s cuts. This is a legal no-man’s land, with huge discretion left to judges.
Medicaid’s expansion is also on autopilot. Even without Obamacare, spending would rise significantly. Older Americans and the disabled now account for two-thirds of costs, though representing only a quarter of beneficiaries. As the population ages, this burden will grow. Their medical care is simply more expensive. In 2011, spending for Medicaid’s average aged recipient totaled $15,931, more than five times the average cost for children, $2,851, reports CMS.
It’s literally schools vs. nursing homes. We need a better balance between workers’ legitimate desire for a comfortable retirement and society’s larger interests. Instead, our system favors the past over the future. Things could be done to mitigate the bias. None would be easy or popular. But it’s first necessary to acknowledge the bias and discuss it openly. This we are far from doing.
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